Franchise 101: A Tasty Appeal; and A Window into Dispute Resolution

Franchisor 101: A Tasty Appeal

The Eleventh Circuit Court of Appeals reversed a district court’s summary judgement order, granting a chocolate shop franchisor’s breach of contract and unfair competition claims. The appellate court concluded there were genuine disputed issues of material fact concerning the materiality of a franchisee’s breach of contract.

Peterbrooke Franchising of America, entered into a franchise agreement with Miami Chocolates in 2007. Peterbrooke sued the franchisee for breach of contract in 2016 for failing to install a new point of sale system (POS) required of all franchises. In granting summary judgment, the district court agreed the franchisee’s breach was material. The franchisee appealed, arguing triable issues of material fact exist as to whether failure to install the new POS was material.

The Eleventh Circuit agreed, explaining that, while the franchisee breached the franchise agreement, termination is only allowed where the nonperforming party breaches a material term. Under Florida law materiality of a breach is generally a question of fact.

Based on Florida law, the terms of the franchise agreement, treatment of similarly situated franchisees, and evidence regarding the functionality of the old POS, the court held Peterbrooke failed to show the franchisee’s failure to update its POS was material to the parties’ contractual relationship. The appellate court noted certain provisions of the franchise agreement state that specific obligations are material while other provisions did not. This led the court to conclude that the use of “material” in certain places was intentional to delineate between material and non-material compliance. The provision of the franchise agreement that concerned updating the POS did not reference materiality. In addition, Peterbrooke’s representative testified that other franchisees in the system were permitted to continue to use the outdated POS until the equipment had been paid off or fully depreciated. Other evidence showed the older POS still allowed the franchisor to monitor and access the franchisee’s sales reports and did not cause any operational issues.

Determining whether a franchisee’s breach of a franchise agreement is material to support termination or nonperformance by a franchisor is generally fact specific. When materiality of a franchisee’s breach is not clear from the agreement or the parties’ course of dealing, franchisors should consult franchise counsel prior to stopping performance, terminating a franchisee, and/or bringing suit for breach of contract.

Peterbrooke Franchising of America, LLC v. Miami Chocolates, LLC, 2022 U.S. App. LEXIS 28222 (11th Cir. Nov. 10, 2022)

Franchisee 101: A Window into Dispute Resolution

Claims by a window sales and installation franchisee against its franchisor were dismissed by a federal district court in Michigan because the franchisee did not comply with the prelitigation mediation procedure in the franchise agreement, requiring the franchisee to seek mediation prior to filing suit.

During the franchisee’s renewal term, the franchisor modified its financial reporting requirements. After the franchisee was terminated based on a failure to comply with the new reporting requirements, the franchisee sued asserting the franchisor wrongly terminated the franchise agreement, despite the franchisee’s attempts to comply.

The renewal franchise agreement required informal discussions with the franchisor and mediation, at the franchisor’s discretion, prior to the filing of a lawsuit. This provision also stated that the mediation requirement survived termination of the franchise agreement. Thus, the franchisor argued, the claims should be dismissed, because the franchisee failed to follow the required mediation procedure.

The court rejected the franchisee’s argument that the mediation requirement was unconscionable because it was only available to the franchisor. The court disagreed, finding that a one-sided mediation option did not rise to the level of procedural or substantive unconscionability.

Next, the franchisee asserted that because the franchise agreement was wrongfully terminated, the franchisor should not be able to require mediation. The court disagreed, explaining that the franchisee offered no support that alleged breach of contract by one party relieves the other of its contractual dispute resolution obligations.

The franchisee then claimed that the mediation requirement did not apply because certain intellectual property claims were exempted from the mediation procedure. The court rejected the franchisee’s attempt to fit its state law claims within an exemption regarding the franchisor’s need to seek judicial relief to protect its intellectual property rights. 

Franchisor defaults and/or termination of a franchisee’s franchise agreements often lead to conflict. Franchisees should review contractual dispute resolution procedures with counsel to determine whether an alternative procedure can be lawfully bypassed prior to starting litigation.

CJ Consultants, LLC v. Window World, Inc., 2022 U.S. Dist. LEXIS 170201 (W.D. Mich. Sept. 20, 2022)




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